The Ultimate Real Estate Accounting Guide 2022 (2024)

If you own or operate a rental property, you need to make sure you have skills in real estate accounting as an essential part of the business. Accounting can seem daunting and is often most people’s least favorite task, but you still need to know the right skills to make sure your business is successful.

With the right accounting skills, you can make sure you keep track of all your income, expenses, and tax deductions.

While most people think real estate agents just connect with people and show homes, there is much more to the job. Real estate agents also need to be able to do administrative tasks and know everything there is to know about the buying and selling process.

Why Do You Need Real Estate Accounting?

While accounting might not be the first skill you think of when it comes to real estate agents, it’s still important for several different reasons. Real estate accounting is important whether you are doing small sales or sales for large corporations.

Accounting is important for a few main reasons:

• You can gain a better perspective into the financial situations

• You can see your business growth from year to year

• Better manage your cash flow

• Catch red flags early

• Streamline tax returns

• Make payments on time by keeping track of outgoing expenses

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The Goal Of Real Estate Accounting

The goal of real estate accounting is to make sure you have a dependable system for handling taxes and income. It allows you to keep track of your business and see how you are doing at any point financially.

You don’t need to know everything about accounting and all the practices, but you should be willing to learn certain skills and make sure you know how to make choices concerning growth and profits.

Real Estate Accounting Vs. Bookkeeping

It’s easy to get the practices of bookkeeping and accounting confused. However, there is a big difference between the two that you should know. Accounting is often broader and encompasses more financial tasks and responsibilities, while bookkeeping is more about invoicing and payments.

Bookkeeping

Here are the basics of bookkeeping that should be considered:

• Tracking payments made to vendors

• Making sure all charges are correct

• Keeping track of recurring and automatic payments

• Having a process in place for invoicing tenants

Bookkeeping also involves keeping track of all debit and credit card charges. Payroll procedures are also included in bookkeeping when needed.

Accounting

Accounting has more to do with preparing for tax time and understanding your gains, losses, and profits. It also includes:

• Managing money to maximize profits

• Meeting tax due dates

• Meeting all tax collection requirements and other business regulations

• Performing financial analysis and audits

Real Estate Accounting: 6 Basic Things You Should Track

Real estate accounting can determine whether you will use your real estate business as a hobby or whether you can turn it into a business that can make real money. Here are some basic things you need to track to make sure you are setting your real estate business up for success:

• Income from commissions

• Continuing education costs

• Association fees and expenses

• Marketing expenses

• Office-related charges

• Travel, transportation, and mileage

Benefits Of Real Estate Accounting

There are many benefits when it comes to real estate accounting that can improve your business and make you more successful. These include:

• Easily Monitor Property Performance

• Cash Flow Improvements

• Better Income & Expense Control

• Tax Audit Backup

Easily Monitor Property Performance

This involves detailed record keeping. You should always compare rental performance from the last year to the current year. This allows you to decide which properties to hold onto and which ones to sell. You can also determine cash on cash return.

Cash Flow Improvements

You should always send rent statements out on time and ensure tenants are paying on schedule. Make sure you track accounts payable and ensure all vendors are paid on time or early.

Better Income & Expense Control

It’s always a good idea to have an accounting system to help track real estate investors and expenses. They can also update your income statements.

Some accounting systems also have mobile apps that you can check on your phone and see when payments and income come in. This allows you to track your money in real-time.

Tax Audit Backup

Real estate agents always have the chance of being audited, even though it does not happen often. An accounting system will automatically make a paper trail for all your expenses and income, so it can make IRS requests much more manageable.

There are three main types of IRS audits you need to look out for:

• Office examinations

• Field audits that are done face to face in your home or business

• Correspondence audit that asks you to send in more information

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How To Set Up A Real Estate Accounting System

You might know by now that a real estate accounting system is necessary, but you might now know how to set one up for your business. Here are seven basic steps to follow when setting up a system.

1. Choose An Accounting Method

2. Separate Your Personal & Business Funds

3. Create A Chart Of Accounts

4. Track Income & Expensees

5. Reconcile Your Accounts

6. Organize Your Documents

7. Create Accurate Performance Reports

1. Choose An Accounting Method

There are two main types of accounting methods: cash and accrual. With the cash method, you will report income in the tax year that it was received, and expenses are deducted in the tax year that those expenses are paid.

The accrual method is different because income is reported in the tax year that it’s earned no matter when the payment was received. Most small businesses use the cash method, but each method has pros and cons.

2. Separate Your Personal & Business Funds

You should never mix your personal and business funds. Consider opening a business checking account to ensure the accounts are not mixed. Keeping your business funds in one place makes it easier to review finances and ensure you are not accidentally spending business money for personal gain.

3. Create A Chart Of Accounts

These are used to separate income from expenses. For rental properties, they should include categories for equity, revenue, expenses, and assets. You should have an account for each category and all the different transactions listed.

You might have sub-accounts for some categories, including rental income and late fees for your revenue category. You can always customize the accounts depending on the investor and the property type.

4. Track Income & Expenses

All money coming in and out of rental properties has to be tracked and recorded. Your accounting system will track these things for you if you have one. Otherwise, you need to make sure you are tracking it yourself.

Each time a transaction occurs, you need to ensure the income and expense are put under the correct category and account. This ensures all your finances are in the right place, and you can account for every dollar that comes in and out of the business.

You also need to make sure you have the details of every account. This makes it easier to understand what the transaction is for and why it was made.

5. Reconcile Your Accounts

This process is crucial because it makes sure the real estate accounting system shows the same money and transactions as the bank. These numbers have to match, or it means you might have lost money somewhere.

Both the ending and the beginning balance need to be the same. Make sure everything matches. If things are missing or not matching, it could be due to time delays, banking errors, or gaps in the transactions.

6. Organize Your Documents

Losing documents can be one of the worst things for your business. You need to make sure you have all your documents organized and have a backup or supporting documents to ensure that nothing is lost.

Here are just some examples of the documents you need to make sure are backed up and kept in a safe place:

• Property tax statements

• Tax returns

• HOA rules and regulations

• Insurance information

• Credit card statements

• Invoices and receipts

• Bank statements

• Vendor contracts

• Mortgage related documents

• Purchase and lease agreements

You can either keep hard copies or scan and upload the documents to a secure place like a cloud-based storage system. You can store them digitally and in hard copy if you prefer. Remember that digital copies are easier to access, especially when you need to find them in a pinch.

7. Create Accurate Performance Reports

Performance reports are important for any job, but especially for real estate because you want to make sure that the investors can see their properties and their portfolio performance. Certain accounting software will be able to arrange all of this for you, making your job much easier.

Your company will need many different performance reports, including income statements. This focuses on revenues and expenses. Net cash flow reports are also necessary and will show the cash moving in and out of the account during certain periods.

The last main report you need is the capital expense report. These track your money and make sure you know where to improve properties beyond just the basic repairs.

Summary

By now, you should know that real estate accounting is essential for your business and expense tracking. It’s important to have financial records of everything you do in the business because you want to make sure your company is successful and can account for all income and money in the chance you get audited by the IRS.

Once you have an accounting system in place, it’s easy to maintain and keep track of all your documents and expenses.

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